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Is a Bitcoin mortgage in your future? Probably not. Mortgages will not be in Bitcoin in the near future. But that doesn’t mean that the blockchain technology that underlies cryptocurrency won’t be making the real estate transaction cheaper and more efficient.

Brad Finkelstein reported on the difficulties of a Bitcoin mortgage (Virtually No Chance Soon for Any Bitcoin Denominated Mortgages; National Mortgage News, 2014). Cryptocurrencies have a history of volatility, Bitcoin most recently lost about a third of its value (see: Bitcoin at crossroads after shedding more than $27 billion in value; marketwatch.com; September 14, 2017). Instability of the currency is a major issue for a thirty-year mortgage. Finkelstein stated that such short-term losses could cause the mortgage holder to “lose their shorts,” and cause the borrower to default. He also pointed out that regulatory hurdles will be difficult to transcend, stating that mortgage rules and closing disclosures are calculated in dollars. Not to mention the difficulty of appraising a home’s value in Bitcoin. Additionally, all parties that are part of the transaction (such as appraisers) need to accept payment in Bitcoin.

Finkelstein also pointed out other cryptocurrency flaws. Unlike currencies such as the euro or yen, cryptocurrencies are not backed by a government that guarantee an exchange rate. Because of the lack of government backing, cryptocurrency values are easily manipulated. Cryptocurrencies have also been associated with illicit internet transactions.

Although cryptocurrency mortgages may not be feasible, Finkelstein noted that “cash” transactions conducted in Bitcoin is a possibility. Luke Stangel reported on a Miami mansion recently listed for sale in Bitcoin (Brother, Can You Spare a Bitcoin? Miami Mansion Is Listed for About 1,400 Bitcoins; realtor.com; September 6, 2017). Two real estate agents interviewed about the sale stated that some aspects of the transaction may still be traditional, such as an escrow being deposited as well as title transfer. However, the transferred funds would be Bitcoin.

Stengel’s report suggested that the interest in conducting real estate deals in cryptocurrencies is to speed up the sales process and provide a secure transaction. However, because of the associated processes that occur during a transaction, the timing of such a transaction may not differ much from any other cash transaction. Security is another issue and can be debated as Bitcoin and other cryptocurrencies have had their share of hacking too.

With so many issues and hurdles, cryptocurrency on its own may not be the (immediate) future of real estate. However, its underlying technology is of interest. The technology that makes Bitcoin and other cryptocurrencies possible is called blockchain.

Blockchain technology has the potential to revolutionize the real estate transaction by reducing the time and cost needed for processing a mortgage and title. Blockchain technology is essentially a chain of blocks. Each block records and holds information. When a block is recorded, it is encrypted and cannot be changed. The recorded information can be currency (such as a Bitcoin transaction), records, contracts, etc. The draw to blockchain is that it is decentralized, making it difficult to corrupt and easy to restore. Additionally, retrieving information is much faster because the chain of information is essentially available at your fingertips.

Many are skeptical of blockchain technology. Not so much because of its disruptive potential, but because it is not impervious to problems. Some issues include security, cost and complexity. A revealing critique of blockchain was written by Jason Bloomberg (Eight Reasons To Be Skeptical About Blockchain; forbes.com; May 31, 2017).

However, blockchain advocates still maintain that the technology provides ease of access and secure recording of blocks of information. The touted benefits are claimed to decrease the time of the average real estate transaction, and reduce the cost to the consumer as well.

Original published at https://dankrell.com

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Although the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while. Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process. Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).

RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals. Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.

RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing. An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent. The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender). In most cases, you’re not required to use the referred affiliated businesses.

RESPA violations are serious, and penalties can be severe. For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.”

The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance. And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).

In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations. Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor. More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).

by Dan Krell
© 2014

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Tag: title company

Blockchain, Bitcoin and real estate

RESPA empowers home buyers and consumers